The Center's work on 'Process' Issues


Thinking About Tax Policy, Part 4: Ryan Plan a Costly Step in the Wrong Direction

April 13, 2012 at 2:18 pm

This series has explained why we need to raise more revenue and why it makes sense to start at the top of the income scale.  The budget from House Budget Committee Chairman Paul Ryan goes in exactly the opposite direction — it would cut taxes deeply at the top and raise even less revenue than if we continued all of President Bush’s tax cuts, leading to bigger deficits and worse income inequality.

Top 1 Percent Would Receive Nearly Half of Ryan Tax Cuts

The Ryan budget would permanently extend President Bush’s tax cuts, which policymakers enacted when the federal government had a large budget surplus and which have since proven unaffordable.  That would cost more than $4 trillion over the first decade alone.

Next, Chairman Ryan would dig the budget hole even deeper with new tax cuts that would cost $4.5 trillion over the first decade (according to the Urban-Brookings Tax Policy Center); he has said he would pay for them by broadening the tax base but hasn’t offered any proposals.  The tax cuts would overwhelmingly flow to the richest people in the country:

  • People with incomes above $1 million would receive a $265,000 average annual tax cut, on top of the $129,000 they would receive from extending the Bush tax cuts.  Their after-tax incomes would rise by 12.5 percent, on average — seven times more than the 1.8 percent average gain for middle-income households.
  • The top 1 percent of taxpayers — those with incomes above $630,000 — would receive 45 percent of the new tax cuts, or nearly as much as the rest of the entire population (see graph).
  • Low-income working families would actually be hit with tax increases because the Ryan plan wouldn’t fully extend President Obama’s tax cuts for working-poor households. People with incomes below $10,000 would see their after-tax incomes fall by 2 percent, on average.

“Fair-Value” Proposal Would Artificially Inflate Federal Lending Costs

April 10, 2012 at 5:10 pm

Charles Lane argues in a Washington Post op-ed today that the official cost estimates of federal loan and loan guarantee programs should include a penalty based on the additional amount that private lenders would charge if they issued the loans and loan guarantees.  But this proposal, to adopt so-called “fair-value accounting,” would make federal credit programs appear to cost more than the government is expected to actually spend on these programs; it would overstate spending, deficits, and debt, as we explained earlier.

Some advocates of fair-value accounting wrongly believe that current budget accounting ignores the fact that some borrowers (homeowners, students, and so on) default on their loans.  In reality, the Federal Credit Reform Act of 1990 already demands that budget estimates fully reflect the likelihood of borrower defaults, including the fact that defaults will likely rise during recessions.

Some advocates, including Congressional Budget Office (CBO) Director Doug Elmendorf, also argue that even if current accounting methods perfectly represent the expected amount of money that the federal government will spend on these programs, they do not reflect the full “cost” for a different reason.

Robert Reischauer, the highly respected former CBO director, explains what the proponents of “fair value accounting” are talking about and why he strongly opposes using that approach in the budget:

The accounting convention used since enactment of the Credit Reform Act of 1990 already reflects the risk that borrowers will default on their loans or loan guarantees. . . . [Fair-market accounting] proposes to place an additional budgetary cost on top of the actual cash flows . . . to reflect a cost to society that stems from the fact that, even if the cash flows turn out to be exactly as estimated, the possibility that the credit programs would cost more (or less) than estimated imposes a cost on a risk-averse public. . . .

A society’s aversion to risk may be an appropriate factor for policymakers to take into account in a cost-benefit assessment of any spending or tax proposal but adding a cost to the budget does not make sense. . . .  Inclusion of a risk aversion cost for credit programs would be inconsistent with the treatment of other programs in the budget (many of which have costs that are at least as uncertain as the costs of credit programs — for instance, many agriculture programs and Medicare) and would add a cost element from a traditional cost-benefit analysis without adding anything based on the corresponding benefit side of such an analysis.  It would also make budget accounting less straightforward and transparent.

[Fair-value accounting] represents a misguided attempt to mold budget accounting to facilitate a cost-benefit analysis, with the result that neither the budget nor the cost-benefit analysis would serve their intended purposes well.  [Emphasis added in bold]

Mr. Lane says, rightly, that policymakers should take into account the societal advantages and disadvantages of federal credit programs when voting on them.  They should do the same when voting on other federal programs and tax policy, as well.  But pretending that the government spends more on these programs than it actually does is the wrong way to accomplish that.

Thinking About Tax Policy, Part 1: The Most Important Tax Reform Chart

April 10, 2012 at 4:23 pm

All discussions of tax reform should start with this chart.  Here’s why.

The mantra that tax reform should “broaden the base and lower the rates” — in other words, scale back loopholes and other special tax breaks and use the resulting revenue to pay for cuts in marginal tax rates — is close to conventional wisdom in Washington.   All else being equal, it reflects sound economics.

Debt Will Reach 195% of GDP Under Current Policies

The problem for the United States is that all else is not equal, as the chart shows.  Our country is on an unsustainable fiscal track, with debt set to rise to economically damaging levels in coming decades if current policies remain unchanged.

Given that fact, the responsible course would be to use the revenue generated from politically difficult base-broadening measures (like changes to the mortgage interest deduction) to help rein in long-term deficits.

Unfortunately, some recent proposals — like House Budget Committee Chairman Paul Ryan’s — place a higher priority on cutting tax rates.  They would give the richest people in the country massive new tax cuts even if that meant no new revenues for deficit reduction and likely even expanding deficits further.

The Ryan plan, which would force cuts in food assistance, health coverage, and other services for tens of millions of low-income Americans, also shows why spending cuts alone cannot bring deficits under control.  Instead we need a balanced deficit-reduction package that includes both tax increases and spending cuts.

Cooper-LaTourette Plan Not as Balanced as Bowles-Simpson

March 28, 2012 at 5:16 pm

Proponents of the Cooper-LaTourette budget plan claim that it reduces deficits through a mixture of two-thirds spending cuts and one-third tax reform — the same ratio as the Bowles-Simpson plan. But that’s not true.

Yes, the Bowles-Simpson plan had roughly two dollars in spending cuts for every dollar in tax increases — if you use a baseline that assumes that President Bush’s tax cuts for upper-income taxpayers expire (and if you count the savings from lower interest payments as a spending cut).  But, the Cooper-LaTourette budget relies on a different baseline — and that makes all the difference in the world.

Specifically, the stated revenue increases in the Cooper-LaTourette plan reflect a baseline that assumes those upper-income tax cuts are extended.  If you calculate the Bowles-Simpson tax increase on the same basis as the Cooper-LaTourette plan, its tax savings are much larger, and the ratio of spending cuts to tax increases is close to 1:1.  On the same baseline on which Bowles-Simpson is 1:1, the Cooper-LaTourette plan is 2:1 — that is, two dollars in spending cuts for every dollar in tax increases, or far more tilted toward spending cuts, and far less toward tax increases, than Bowles-Simpson.

Budget from Reps. Cooper and LaTourette Doesn’t Live Up to Its Name

March 28, 2012 at 1:51 pm

We’ve released an analysis of the new budget proposal from Reps. Jim Cooper and Steven LaTourette.  Here’s the opening:

Reps. Jim Cooper (D-TN) and Steven LaTourette (R-OH) unveiled a budget plan on March 27 that they call the “Simpson-Bowles Budget.”  It departs significantly, however, from the Simpson-Bowles commission plan in key respects — raising taxes much less, cutting much more from non-security discretionary programs and less from defense and other security programs, and, as a result, providing a blueprint that’s significantly to the right of the Simpson-Bowles commission plan.

The Senate’s Gang of Six proposal last summer showed that policymakers can design a balanced, relatively well-designed deficit-reduction package using the framework of the Simpson-Bowles commission report.  Unfortunately, the Cooper-LaTourette plans falls well short of the Gang of Six plan and does not represent the same type of balanced policy.

Click here for the full report.